1. Oil and the Global Economy
After climbing from a trading range in the low to mid $70s in late September, oil prices have remained in the low $80s for the past three weeks – closing at $81.25 on Friday. Much of the daily oil price movements are tied to the dollar rather than news concerning the oil markets. Opinions are mixed as to whether a possible resumption of “quantitative easing” will or will not help the US economy recover. Some believe the $10 a barrel increase in oil’s trading range during the past month is an overreaction to the prospects for economic growth.
The fundamental question remains as to whether demand for oil from China, India, and the oil exporting nations will be so strong over the next two years that it outruns sluggish or possibly falling demand from the OECD countries and begins to drain global stockpiles. Last week there were a number of reports and developments that bear on this issue.
Beijing announced last week that it had imported a record 23.3 million tons of crude in September -- rebounding from a slowdown in August. Although much of this increase is due to the continuing expansion of China’s economy, exports were up 25 percent year on year in September; analysts point out that Beijing also is making a major effort to build its strategic reserves while oil prices are still relatively low.
The EIA reported that total commercial petroleum inventories were down by 4.7 million barrels in the US the week before last mainly due to lower imports. Some of this drop was likely due to temporary import problems. The IEA, however, reported that preliminary figures show a sharp drop of 31.7 million barrels in OECD stocks during September. The two reports suggest that while global stockpiles are well above average, stronger demand from Asia, Germany, and the US may already have started drawing down stockpiles. While US gasoline consumption over the last four weeks was down 1.1 percent from last year, increased demand for distillates and jet fuel increased total US consumption over last year by 1.1 percent.
The IEA recently revised its projections for global oil demand in 2010 and 2011 upwards by 300,000 b/d to an average of 86.9 million b/d and 88.2 million b/d respectively. This is a yearly growth increase of 2.1 million b/d in 2010 and another 1.2 million b/d in 2011. The IEA estimates that global oil production fell slightly in September to 86.9 million b/d but was still 1.5 million b/d above September 2009.
Analysts watching the balance between depletion of existing oil fields and new ones coming on stream see little if any increase in total global production coming in 2011. This suggests that an additional million b/d of oil consumption will have to come from existing stockpiles or activation of reserve productive capacity in Saudi Arabia and the smaller Gulf oil producers. If this does not happen, then sharply increased prices, which will damage economic growth and reduce demand for oil, may occur within the next year or so.
While some analysts, still focusing on the unusually large US stockpiles, are forecasting a drop in oil prices in the near future, Goldman Sachs Group released a new forecast for “substantially higher oil prices” in the second half of 2011 and 2012 as the global inventory surplus is exhausted. At least some parts of Wall Street seem to be grasping the reality that six years of flat global oil production is trying to satisfy increasing global demand.
As was widely forecast, OPEC left its global production targets unchanged last week while calling on its members to do a better job in adhering to its existing quotas set two years ago. As usual, the position of the Saudis, as the only member with significant spare production capacity, carried the most weight. Saudi Oil Minister al-Naimi was quoted as saying -- “Current prices are "good," and Asian demand is "good." "The market is well supplied. It is an ideal situation we are in now. Nobody is complaining. Consumers are happy, producers are happy. Companies are investing. Demand is healthy - very healthy."
Beneath the happy talk was an undercurrent of dissent. The 12 percent decline in the Dollar Index since June means that there has been a substantial drop in the real revenues OPEC members have been receiving for their oil despite recent price increases. Venezuela’s oil minister called for oil to rise to $100 a barrel. As Caracas is no longer in a position to increase production, the only way it has of increasing revenues is to con other OPEC members, primarily the Saudis, into cutting production and driving up prices.
The Saudis who are well aware of what happens to the global economy when prices get too high keep saying that $70-80 oil is the sweet spot that will allow economies to grow, and oil producers to achieve enough revenue to keep functioning and invest in new production. There seems to be some sort of “sweet spot creep” underway as OPEC President Pastor noted at the Vienna meeting that $75-85 oil is not a problem for the global economy.
There is of course a great contradiction between the call for adherence to quotas and keeping a lid on prices, since much of the 1.5 million b/d increase in the global oil production came from over quota production by OPEC. Should a serious effort to adhere to quotas start, prices would spike considerably higher. Indeed much of the million b/d of new production that will be needed to keep prices under control in 2011 will have to come from those OPEC members that are not already producing flat out.
Another sidelight to the conference is what to do about Iraq which in making an effort to increase production five-fold and is not bound by a production quota due to its political stress during recent decades. At some point a quota for Iraq may become a major point of contention within the organization.
3. Lifting of the deepwater ban
On Tuesday the Obama administration lifted the moratorium on deep-water drilling in the Gulf of Mexico, which had idled 33 drilling rigs, some six weeks ahead of schedule. The U.S. Interior Department said oil companies must comply with new regulations and demonstrate they can adequately respond to blowouts before new permits are issued. The announcement was met with a mixture of praise and skepticism in the Gulf pro-drilling states where any kind of federal restriction on drilling is seen as a threat to jobs. Many see the lifting of the moratorium as a token political move prior to the November elections. In general the drilling industry welcomed the move but fears that a de facto ban caused by new regulation could slow the return of deepwater drilling to pre-spill levels.
The issue of regulating offshore drilling still has a long ways to play out. The delays and costs involved in complying with the new regulations have yet to be seen and the question of drilling and accidents in thinly populated arctic regions has yet to be addressed. The question of whether the new US regulations become a world standard governing drilling by US and other oil companies in waters around the world is unresolved. Adherence to such regulations could add substantially to the costs of off shore oil fields which are expected to produce half of the world’s oil supply by 2015.
The EU decided last week not to impose a moratorium on deepwater oil drilling after the UK and European Parliament rejected calls by the EU energy commissioner for a temporary ban. The EU instead recommended legislation to enforce tough new safety standards.
Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)